MORTGAGE FOCUS with Kelly Wealth Lending Services and Acceptance Finance

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1 July/August 2015 MORTGAGE FOCUS with Kelly Wealth Lending Services and Acceptance Finance Happy New Financial Year! We hope that tax time is not proving to be too tedious for you and you re looking forward to getting a great tax refund this year. We ve had loads of refinance and investment related queries lately, so this month s newsletter is focused on property investment. First, let s start with the interest rate situation. At its July meeting, the Reserve Bank of Australia (RBA) decided to keep the official cash rate on hold at 2.0 per cent. This decision was widely expected by analysts and we should be able to look forward to stable interest rates for the remainder of the year. However, the situation in Greece is affecting global markets and we will have to wait and see how this influences the RBA with regard to our monetary policy moving forward. Winter is here and property markets around the country have slowed as a result. Even the Melbourne and Sydney markets are showing significantly reduced auction numbers. However, the combined capital city clearance rate was still 78.1 per cent, which was the strongest result since the beginning of June, showing us that property buyers are still in the market and activity is still quite high for this time of year. Around the country, there were only 1,273 reported auctions last week, mostly due to the winter weather in southern/eastern states and school holidays. This compares to 2,249 auctions the week prior, so you can see how much market activity has slowed. Sydney held the highest number of auctions at 566 recorded results, with a clearance rate of 84.5 per cent which is very high. Melbourne followed with 527 auctions with a clearance rate of 76.7 per cent. The next highest number of auctions was Brisbane which held 74 auctions with a clearance rate of 68.9 per cent, then Adelaide with 57 auctions and a clearance rate of 75.4 per cent. Perth held just 20 auctions with a clearance rate of 20 per cent. Canberra held 57 auctions with a clearance rate of 75 per cent. Home values are up across the board for all capital cities, except for Perth and Darwin. Sydney home values were up by 2.75 per cent over last month and up by per cent over this time last year. Melbourne is also doing very well, with home values rising by 2.92 per cent over the last month and per cent over this time last year. As expected, growth in other markets has been slower, but quite steady in most cases. Brisbane/Gold Coast home values were up by 1.76 per cent for the month and 3.51 per cent for the year. Adelaide was up by 0.39 per cent for the month and 4.46 per cent for the year. Canberra home values were up by 0.58 per cent for the month and 2.44 per cent for the year and Hobart home values were up by 1.79 per cent for the month and 0.85 per cent for the year. Perth s home values were down by 0.35 per cent for the month and 0.86 per cent for the year and Darwin showed a decline in home values of 3.93 per cent for the month and 2.93 per cent for the year. Reference CoreLogic. Auction number projections are showing that property market activity should increase again after the school holiday period has ended. So if you re in the market to purchase a property, now is a good time to talk to us. The start of the new financial year is also a great time to get your annual home-loan-health-check, so please give us a call today. In this Issue: Common mistakes investors make What do APRA s changes mean? Property to fund retirement

2 Common mistakes that property investors make Property investment has always been popular in Australia. However, like all forms of investment, there are loads of variables involved and it s easy to make expensive mistakes. Building wealth through property investment can be a lot of work particularly if you re new to property investment and are not aware of exactly what s required. In this article, we outline some of the common mistakes made by first time property investors so you can plan ahead to avoid them. Not doing your homework Many people make the mistake of buying a property simply because they like it, or think it is a bargain. But not every property makes a good investment. When you find a property that you might like to purchase, it is very important that you do your research to ensure it will give you the return on your investment that you will need. Ask yourself these questions, and importantly, take the time to research the answers carefully: Will it be easy to find tenants/will the property be in high demand? What rental income can I expect? Does the property have strong capital growth potential? Is it in a growth suburb? Am I paying the right price? How long will I have to hold the property before I can make a profit by selling it? Not factoring in all of the costs Cash-flow is a very important factor when you plan to invest in property and it s the area where many first-time investors come undone. It s not only important to factor in all the costs of buying the property, you must also factor in all the costs of running the investment and maintaining it from the outset. When you research the rental income you can expect from a property, you will first need to know exactly how much rental income you will need to cover the costs of holding it. The actual costs will vary from property to property if you purchase a new home, for example, you will not need to factor in much by way of maintenance costs at first. But if you purchase an older property, you will need to make an estimate of what work is going to be needed and when, and how much this will cost and factor that into the budget. Ask yourself these questions: Will the rental income be enough to cover the costs of a property manager, advertising for tenants, regular general maintenance, council rates, building insurance and landlord s insurance? How will I cover the costs of large repairs say if the hot water system needs replacing quickly? How will I cover the costs when the property is untenanted and there is no rental income? How long is the average vacancy time in this area? How long will I have to budget for? Not getting the property management right A property manager is the liaison between you as the landlord, and your tenant. First time investors often believe that managing their own property will save them money. However, it should be remembered that your property management costs are usually tax deductible and few people have the skills to not only find tenants quickly, but choose the right ones. Property managers find your tenants, vet them by performing credit checks and then collect the rent every month. They deal with tenant requests, organise regular maintenance and pursue action when disputes arise. They keep track of rents in your area and make sure your rent keeps pace with the market.

3 In short, a good property manager will help you maximise the return on your investment and save you from many sleepless nights. However, some property managers are better than others, and fees vary. You should carefully research your property manager before engaging them ask around, check references and make sure they have the resources to do a good job. If you need help with this, ask us for a referral. Not talking to a tax professional Did you know that you should obtain a depreciation schedule as soon as you purchase the investment property, preferably at settlement? Not many people do. It s a document that helps your accountant determine how much you can claim back on tax each year. One of the major mistakes people make with investment property is not planning ahead to make the most of their tax deductions. In order to ensure you understand what you can and cannot claim, you need to talk to a tax professional and/or accountant early on in the process. Getting it right will help to ensure you come out ahead and enjoy substantial savings. Getting it wrong will cost you money you may never get back. We have many expert contacts in this area so if you need a quality referral to an accountant, please get in touch. Getting the finance wrong Before you commence your property investment journey, it is wise to make a plan about what you want to achieve your financial goals for the future. We recommend you sit down and talk to us about getting the right financing to achieve these goals. Taking a haphazard approach to financing your first, and then subsequent investments, could cost you more money, limit the amount of investment properties you can acquire and even be a recipe for disaster if something goes wrong. We can t stress enough how important it is to formulate a plan before you begin, and talk to us about your financing before you even consider making a property purchase. We will help you set up the financing arrangement that is most advantageous to you considering your goals and your personal financial circumstances. If you re thinking about making a property investment, why not talk to us? We are happy to take the time to discuss your plans, get you pre-approval for your financing and introduce you to a team of other professionals who can help you to avoid these expensive mistakes above! Give us a call we re here to help.

4 What do APRA s property investment lending changes mean to me? Some of you may have heard that APRA has cracked down on investment lending, influencing many lending institutions to review their investment lending policies. But we imagine for the majority of you, it s a case of APRA, who?. In short, APRA are making some changes to investment loans, and we thought you would like to know if and how these changes impact you. In this article, we take a look at APRA and what they re doing to keep borrowing conditions stable for you as an investor. What is APRA? The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian financial services industry. Their role is to regulate the behaviour of lenders, banks, credit unions, building societies, general insurance companies, private health insurance agencies, and the superannuation industry. APRA plays a critical role in protecting you, and the financial well-being of the Australian community, by upholding standards of trade in the financial industry. Their mission is to establish and enforce standards and practices designed to ensure that under all reasonable circumstances, financial promises made by institutions are met and that our financial industry remains stable, efficient and competitive. As a consumer, APRA s activities ensure that you have a reliable, fair financial industry and you can go about your day to day transactions and investments with confidence. What are APRA s new measures regarding property investment lending? In December 2014, APRA wrote to all deposit-taking institutions (such as banks and other lenders) setting out sound lending standards, particularly for investment lending, that included a benchmark for the 10% maximum growth of residential investment mortgages. This occurred because of concerns over the number of people entering the property investment market and the stability of lending for this market considering current economic conditions. Their particular focus is on restricting high loan-to-value and high loan-to-income lending, which may be risky for consumers if there should be a rapid or sudden decline in housing values or the property market in general. They also perceive the rapid growth in property investment lending as risky insofar as Australian consumers may be placing all their eggs in one basket and they would prefer to encourage investment diversity amongst consumers. By taking these measures, APRA is looking to make property market conditions safer for you as a consumer. By slowing down investment lending, APRA is also looking to slow down the rapid growth in property prices, particularly in Melbourne and Sydney where property prices are considered to be overheated by many property market analysts. What does this mean for property investment borrowing? Many lenders and financial institutions are changing their criteria for property investment lending in order to meet APRA s requirements. Most major banks have announced that they will be cutting the discounts available on investment loans, which means that interest rates on new investment loans could be slightly higher than interest rates on owner-occupied home loans. Additionally, most lenders have tightened up their criteria for investment borrowing. Many are focusing on loan-to-value ratios, meaning you may require a larger deposit than previously and may find it more difficult to leverage properties or access equity to invest further if you are already an investor.

5 Can I still get a property investment loan? As your professional mortgage broker, your financial well-being has always been our number one concern. One of our primary responsibilities has always been to assess your personal financial situation and goals, and ensure that any loan we offer to you suits you, your financial goals, and your expenses. Before applying for a loan for you, we always take into consideration whether or not you would be able to service your loan in the event that interest rates should rise and recommend insurance products such as mortgage protection insurance and income protection insurance to mitigate the risk of you not being able to meet your loan repayments if faced with a hardship situation. Plenty of lenders are still offering property investment loans to borrowers who qualify under their new property investment lending criteria. It is likely that you will still be eligible for a loan and if you are looking to use property investment as a means to build wealth for your future, you should talk to us about your plans and investment goals sooner rather than later. We re here to help you work out if property investment is right for you. We have access to a wide variety of lenders and we ll shop around amongst them to find you the most favourable loan considering your personal financial circumstances and investment goals. Call us today. For more information on APRA, please visit their website, or speak to us.

6 How do I use property to fund my retirement? With interest rates at all-time record lows, property has recently become very attractive to a wider range of investors. The media is full of articles and commentaries talking about using property to help fund retirement, with many even talking about it as a means to completely replace an employment income so they can quit work early. Whilst property investment has a proven track record as being a comparatively safe way to build wealth for the future, is it really possible to use property as a means of finding financial freedom and funding your retirement? And if so, how do you go about it? Here s an outline of two commonly used property investment plans: Plan A Living off the rental income Many people create an investment property portfolio with the notion that one day, the properties will be all paid off and they will be able to live on the rental income. But if you are planning to fund your retirement this way, you ll need to take into consideration that this rental income will be subject to income tax and some of it will also be required for property management, maintenance, insurance and rates. In other words, a sizeable chunk of the income your properties produce around 50 60% will be used up before you can allow for your living expenses. In theory, it ought to be possible to create a property investment portfolio large enough to cover all these expenses if you start soon enough and plan carefully from the outset. How much income you will need is up to you. Considering you will lose at least 50% of the income to tax and expenses, then if you want an after tax income of $100,000 you will need to plan to have a portfolio of properties that is generating at least $200,000 a year. Plan B Living off the equity Many property investors take the approach that paying off the loan completely is not ideal. Instead, they simply reduce the loan to value ratio as far as they can and then fund their retirement living expenses by borrowing against the equity if and when they need it. Acquiring funds this way does not attract income tax*, which is one of the main benefits of this plan. However it should be noted that every time you withdraw some of your equity, the repayment amount and interest due on your loans will rise. As long as your properties continue to experience capital growth and the rental income keeps pace with the rises in your repayments, this plan may seem like an endless cash machine. But if market conditions create a situation where both rents and property values fall dramatically, you may find yourself in a position where your equity declines so much that you can t borrow any more money, or you may need to start selling off your properties in order to meet your repayment commitments which may not be ideal. Of course, selling off your properties to fund your retirement is also a possibility. However, you will need to take into consideration capital gains tax and carefully plan ahead to ensure you have generated sufficient potential funds to meet your needs. Get professional advice before you start The truth is that using property to fund your retirement is not as simple as it sounds - there are many variables involved. But one thing is for sure, if you want to use property to gain financial freedom in the future, then you need to have a plan. And the sooner you start to implement your plan, the more likely it is that you will achieve your goal of funding your retirement with property. Before you take the plunge and start buying up investment properties, it is very important that you get some expert advice to help you formulate an investment plan that is right for you. If you want to be a successful property investor, then it pays to have a team of professionals who can advise you along the way and help you to avoid making costly errors. This team might include a financial planner, tax specialist, property manager and certainly us a reliable team of mortgage experts.

7 If you re thinking of using investment properties to build wealth and perhaps, fund an early retirement, then give us a call now. We can not only help you with the right financing, we can also refer you to some of the experts you will need to create your team of professionals and formulate a firm plan for success. So please give us a call today! *This article does not constitute tax advice. The information contained in this article is general in nature and does not take into account your personal situation. Tax issues relating to property investment can be complicated and you should always consult an accountant or qualified tax adviser. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Quarterly Client Feedback Survey Winner April - June 2015 Tony and Megan Webb Contact us Kelly Wealth Lending Services T: F: E: lending@kellywealth.com.au W: Powered by Acceptance Finance Level 1, 35 Whitehorse Road, Balwyn VIC 3103 Australian Credit Licence Number: ABN: